How exchange operators have grown bigger and bigger

After a year in which a handful of companies have tightened their grip on the trading infrastructure and financial data that underpin financial markets, all eyes will turn to Brussels next month.

EU competition regulators have until January 21 to decide whether to approve the London Stock Exchange’s $27bn acquisition of data and trading group Refinitiv, a blockbuster takeover first agreed in August 2019 and one that authorities opened an in-depth investigation into in June.

Since the LSE struck its deal with Refinitiv, best known for its Eikon terminals on traders’ desks, the land grab among companies for a slice of the valuable data that lubricates markets has accelerated. Last month, S&P Global, the owner of the eponymous rating agency, agreed to pay $44bn for financial analytics company IHS Markit.

Not every recent deal in the industry has been about data. Last month, Deutsche Börse, which runs the Frankfurt stock exchange, took a majority stake in Institutional Shareholder Services, which advises shareholders on how to vote on everything from mergers to executive pay. Days later, Nasdaq sealed the $2.8bn purchase of financial crime software group Verafin.

Though eye-catching, industry analysts, lawyers and academics said the dealmaking of the past 18 months only extends the sway of the largest data providers and exchange groups that has been steadily growing since the financial crisis.

The biggest players have set their sights on owning more of the building blocks on which investors rely, including data, analytics, indices, the venues on which trades are executed and the businesses that subsequently settle them.

Just over half of the $35bn in revenues the industry generated last year came from just five exchange operators — CME, Intercontinental Exchange, London Stock Exchange Group, Deutsche Börse and Nasdaq — according to Burton-Taylor International Consulting .

It is why next month’s decision by the EU, which in 2017 torpedoed a planned €29bn merger between the LSE and Deutsche Börse, will be so closely watched. A deal will create a rival to Bloomberg, the US group.

“If it goes through everything is possible,” says Johannes Petry, an academic who specialises in capital markets at Warwick University in the UK, and argues exchanges are becoming powerful market actors in their own right.

In an effort to see off EU concerns that the group will dominate trading in European sovereign debt and interest-rate derivatives, the LSE has agreed to sell Borsa Italiana to Euronext for €4.3bn.

LSE and Refinitiv, which has more than 400,000 users, are likely to take comfort from the fact that other regulators, including in the US, have waved the deal through. In its review, the Department of Justice found that rivals who purchased products and services from the LSE or Refinitiv also often sold services back to the two.

That “significant bargaining leverage” would make price increases from the combined group unlikely, the DoJ concluded, and any potential fee increases were unlikely to be passed on to customers.

Yet executives and lawyers caution that navigating the antitrust process for high-profile deals is also about politics, especially in Brussels.

“It starts off as a dry technical exercise in the beginning . . . but it is natural for a utility to be subject to political steering. Utilities, like water or energy become politicised,” said one executive who had been through the antitrust process in Brussels and likened exchanges to utilities because of investors’ reliance on them and the lack of alternatives.

“Within the EU you have much less comfort with large size [of companies]”, the executive added.

As the LSE awaits the EU ruling, Doug Peterson, S&P Global chief executive, said that he expects any regulatory issues thrown up by the purchase of IHS Markit to be resolved. According to Burton-Taylor, the combined group will be the largest index provider in the world by revenues and account for a quarter of $4.1bn the index industry generates each year.

Stephan Leithner, a member of the executive board of Deutsche Börse, also downplayed any concerns over the German group’s acquisition of ISS, which along with Glass Lewis is the dominant shareholder advisory group.

“There’s no concentration issue. We’re not active in the corporate governance market,” he said. “ISS will operate completely independently. [For investors] it’s about quality and access to the information.”

Tyler Gellasch, executive director of Healthy Markets Association, a trade group that promotes transparency in capital markets, said that the takeover by Deutsche Börse risked eroding customers’ trust in ISS.

“How much will investors trust the advice of a company that has so many deep relationships with issuers?” said Mr Gellasch.

ISS wields considerable sway over corporate governance issues, which also have a bearing on the trading and data businesses of Deutsche Börse. The company is trying to build ESG indices, for example.

Industry experts said the growing ambition of a handful of companies within financial data, analytics and trading mean that the decision EU regulators face on the LSE deal is unlikely to be the last one.

“There are potential conflicts of interest with them expanding their range of services along the value chain,” Mr Petry noted.